Market rout stalls rates policy in Asia

Singapore, 31 August Doubts about the outlook for Asian economic growth and jittery markets resulting from the US subprime crisis are persuading regional central banks to hold interest rates steady until the financial dust settles.

The central banks of Japan, Thailand and the Philippines have held rates steady in the past week or so. Their counterparts in Australia, South Korea and Indonesia meet next week and are expected to keep rates on hold as well.

“Generally, Asian central banks are still waiting to see how the US financial jitters are going to play out, and whether that will affect the US economy,” said Frederic Neumann, economist at HSBC in Hong Kong.

The credit squeeze has already prompted the Federal Reserve to slash its discount, or bank lending rate, and raised expectations it will cut the key fed funds rate by its next scheduled meeting on 18 September.

Serious doubt has been cast on the chances of a European Central Bank rate rise at the authority’s scheduled meeting on 13 September.

Policy direction among Asian central banks has varied. Malaysia has held rates steady, while Indonesia, the Philippines and Thailand have been cutting them.

South Korea, Taiwan and India have been raising rates, but Andrew Freris, chief Asia economist at BNP Paribas, said he expected their central banks to hit the pause button.

“The crisis is likely to have caused some direction reversals, or at least reinforced the case for a period of ‘wait and see´ as the crisis played out,” he said in a client note.

“But there has been no wholesale attempt to ease monetary conditions or cut rates.”

The Bank of Japan had been expected to raise rates in August until the market turmoil and jittery markets mean its plans to tighten policy are being put back, analysts say.

Global markets have whip-sawed on news about the credit squeeze, finding comfort from soothing central bank comments and alarm as financial firms report their exposure to the US subprime mortgage market.

MSCI’s measure of Asia Pacific shares ex-Japan is up more than 2% at 0625 GMT, but it was still down more than 6% from its July 24 peak.

Keep status quo

The Bank of Indonesia, which left its policy rate unchanged on 7 August after 13 cuts since April last year, is expected to keep the rate steady at 8.25% .

“It is not the right time to cut the interest rate,” Miranda Goeltom, senior deputy governor of Indonesia’s central bank, said earlier this week.

Analysts expect the Philippine central bank, which kept its overnight borrowing rate at 6.0% last week, to maintain that policy for the time being.

The central banks have recently intervened in currency markets to sell the dollar so as to support the battered Indonesian rupiah and Philippine peso as investors dumped the riskier, high-yielding units.

The rupiah, the worst performing currency against the dollar in Asia this year, has lost nearly 4% since 24 July. The peso has fallen just over 4% since 20 July.

In the latest test of central bank sentiment, the Bank of Thailand held a steady course, confounding most expectations that it would cut rates despite the market turmoil.

“Risks to the global economy and financial markets increased as a result of rising concerns in the US subprime market,” the central bank said.

However, there is little sign that China’s central bank will take its fingers off the trigger.

It raised rates last week for the fourth time this year in response to surging inflation. Annual inflation in July was a 10-year high of 5.6%.

“While policy makers are closely watching global financial markets, China enjoys a degree of insulation from recent developments that no other major economy can claim,” JPMorgan economists said in a research report.

Room to cut rates

Economies in Asia, excluding Japan, are on track to grow an average 8% this year, led by China’s double-digit rate.

Inflation is picking up in China, Singapore and South Korean, but remains relatively benign across the region, partly due to longer-term currency appreciation that has helped curb import costs.

Several regional banks, including Singapore’s DBS Group Holdings, have reported a combined exposure to the US subprime markets of several billion dollars, but statistics have not pointed to any broader economic distress.

Still, fears about a US recession loom large in a region where an estimated 15-20 % of exports goes to Americans.

Lehman Brothers economist Rob Subbaraman argued that Asia remained vulnerable to a global slowdown, given that 70% of intra-regional trade depends on final demand from outside the region.

“But a currency crisis is highly unlikely as fundamentals are strong and central banks have massive foreign exchange reserves. This is very different to 1997-98 when, with virtually no FX reserves, interest rates had to be hiked to defend currencies,” he said in a research note.

“This time there is little need to raise rates. In fact, with low inflation there is plenty of room to cut rates if growth starts slowing sharply,” he said. Reuters